Buy Apollo Tyres Ltd For Target Rs.270.00 - Sharekhan

Commissioning of Hungary plant and receding threat from Chinese imports to boost topline:

Apollo Tyres (ATL) recently commenced operations at a greenfield facility in Hungary (Eastern Europe). The plant is already certified by leading OEMs for supplies and ATL can serve the OEMs through this new plant. The Hungary plant’s capacity (6.2 million tyres per annum) is similar to the current Vredestian plant capacity (6 million tyres per annum). As per ATL, the company aims to produce about 1.8 million passenger car tyres from Hungary in FY2018, which would be ramped up to 5.5 million by FY2020. ATL also aims to produce 0.7 million truck tyres from the Hungary plant and is expected to reach the fully ramped-up capacity by FY2020. The Hungary plant will further boost ATL’s European operations (currently contributes about 30% to its total revenues) going forward and we expect a 15% CAGR in its European revenues over FY2017-FY2019. Further, the threat of Chinese imports has considerably reduced (imports have halved in the last 2-3 months post demonetisation and due to the shift in Chinese players’ focus to the US market). As a result, the domestic tyre companies have regained their lost market share. We expect ATL’s domestic operations to clock a revenue CAGR of 11% over FY2017-FY2019.

Pricing power and benign RM outlook to expand margins in FY2018:

The receding threat from the Chinese tyre imports has improved the pricing power of the domestic tyre companies such as ATL. The company has been undertaking price hikes consistently since February 2017 (cumulative price hike of ~4% at blended level), which more than offset the impact of increase in Raw Material (RM) costs witnessed in the last 3-4 months. Apart from the domestic market, ATL has announced price hikes of about 7% in Europe w.e.f. May 2017. Further, rubber prices have recently corrected from the peak levels witnessed in the December-January period when there was a supply disruption from Thailand. International rubber prices have corrected by about 20% in the last two months after supplies reached normal levels while the domestic rubber prices have declined by about 10%, tracking the fall in the international prices. The outlook for rubber prices remains benign in the medium term, which augurs well for ATL. The company’s consolidated margins are estimated to improve from 14.6% in FY2017 to 15.1% in FY2019.

Estimates and PT raised; maintain Buy:

The off-take of domestic tyre companies has improved on the back of the reduction in the Chinese tyre imports (down from a level of 1.5 lakh tyres/month in November 2016 to about 75,000 tyres/month currently). Also, ATL’s European operations would see strong double-digit topline growth with the commencement of the greenfield plant in Hungary. Overall, we expect a 13% CAGR in topline for ATL over FY2017-FY2019. Apart from the improved topline, the fall in Chinese imports has given better pricing power to domestic tyre players such as ATL. The company has taken cumulative blended price hikes of about 4%, which more than offset the increase in RM prices. We expect ATL’s bottomline to grow at a CAGR of 20% over the next two years. We have increased our FY2018 and FY2019 earnings estimates for ATL by 14% each. We retain our ‘Buy’ recommendation on ATL with a revised price target of Rs270 (Rs238 earlier).

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